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Xiaomi joins US$10b club

Doug Young

BIO

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young’s China Business Blog (www.youngchinabiz.com), commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, “The Party Line: How the Media Dictates Public Opinion in Modern China.”

Lei Jun, founder and CEO of Xiaomi, speaking at a launch ceremony of Xiaomi Phone 2 in Beijing. Photo: Reuters

Froth in company valuations seems to be building once again in China's high-tech realm, with word that up-and-coming smartphone maker Xiaomi's latest fund raising values the company at more than $10 billion (HK$77.5 billion). The last time I wrote about such a rapidly rising valuation was about two years ago when an investor in high flying e-commerce site Jingdong proclaimed that company was also worth more than $10 billion (HK$77.5 billion). Jingdong's value later came down considerably, and I wouldn't be surprised if Xiaomi's latest valuation is also just a bit too high on too much investor enthusiasm about this company that is growing fast but also playing in a very competitive market.

The latest report cites Xiaomi co-founder Lei Jun giving the new valuation, after the company reportedly raised about $2 billion (HK$15.5 billion) in new funding last month. The report gives a nice summary of Xiaomi's rapidly rising valuation, tracking each of its new funding rounds over the last few years and how they valued its net worth.

A $41 million (HK$318 million) funding in 2010 around the time of its founding valued Xiaomi at a relatively modest $250 million (HK$1.9 billion). Since then the company's value has increased at breakneck pace as its mid-range, high performance smartphones launched in 2012 saw strong growth. Xiaomi's value quadrupled to $1 billion (HK$7.75 billion) in 2011, then quadrupled again to hit $4 billion (HK$31 billion) last year as it began posting its first sales. The latest valuation represents a slight slowdown from its previous rapid growth, but is still an increase of two to three times its value from just a year earlier.

The quickly inflating figure comes as Xiaomi has just entered the low-end of the smartphone business with its Hongmi model costing just 799 yuan (HK$1,004). Strong initial Hongmi sales prompted Xiaomi to say it now expects to generate more than 26 billion yuan (HK$32.7 billion) in revenue this year, or more than double the 12.6 billion (HK$15.8 billion) it made in 2012. It said the amount could further double to more than 50 billion yuan (HK$62.9 billion) next year.

To put this latest valuation in perspective, we should look at comparable values for some of China's other prominent tech firms. Among China's overseas listed Internet companies, only online game leader Tencent (0700.HK) and search leader Baidu (Nasdaq: BIDU) have higher valuations. Privately owned e-commerce leader Alibaba is also worth well over $10 billion (HK$77.5 billion), and some say it could be worth up to $100 billion (HK$775 billion). But other major Internet names like Sina (Nasdaq: SINA) and Qihoo 360 (NYSE: QIHU) are worth less than $10 billion (HK$77.5 billion), and even PC giant Lenovo (0992.HK) is only worth about $10 billion (HK$77.5 billion) based on its latest share price.

In my view, Xiaomi's fast growing valuation is at least partly due to the big buzz around the company generated by Lei Jun, who is admittedly a master at creating such buzz and hype around his products. It's also interesting to note that one of Xiaomi's major investors is Russia's Digital Sky Technologies (DST), an early Facebook (Nasdaq: FB) investor and another master at generating hype around its investments. DST was believed to be one of the firms that drove up Jingdong's valuation to the $10 billion (HK$77.5 billion) mark two years ago, even though the figure has dropped down to around the $6 billion (HK$46.5 billion) level since then as the company tries to become profitable.

Against all that backdrop, I think it's almost certain to say that Xiaomi is currently overvalued, and that its market valuation is unlikely to keep growing at previous levels and could even start to shrink soon. The company has thrived on a boom in low-cost smartphones, but could soon find itself hit by a series of price wars as it vies with other big names like Lenovo and Huawei for share in the crowded space. At the end of the day, I would expect to see Xioami's market value either stagnate or even fall a bit in the next two years, as it struggles to maintain its growth rate while moving towards an IPO.

Bottom line: Xiaomi $10 billion (HK$77.5 billion) valuation based on its latest fund raising is probably too high, and the figure is likely to stagnate or even come down in the next one to two years.